Your Business, A Buyer's Valuation.

June 6, 2017

 

Everyone asks, What is my business worth?

 

An important question in determining whether you are ready to sell your business today, next year or if you want to sell your business at all. Here are a few of the factors that potential buyers of your business use to determine their asking price and influence how they would structure that deal.

 

 

1.      Financial Risk-

a.      Are you able to demonstrate stable revenues and profits over the past five years?  Large year to year fluctuations in your financial performance equals uncertainty.  Buyers do not like additional risks in their deals.

b.      Is your revenue and profit growing or shrinking?  It is easy to invest in a growing company.  If revenues or profits are falling, ask yourself why and what must be done to reverse that trend.

 

2.      Quality of Financial Information-

         Audited financial statements are the best, but that is expensive and most companies only go through the audit process when they must.  Reviewed financials provide investors some comfort that a professional has looked at the books.  If you have neither, a good set of financial records are a must.  Invest in Quickbooks and a consultant to get your records straight.

 

3.      Diversification Risk-

a.      Customer concentration increases the risk for the investor. If more than 50% of your revenues come from five or fewer customers, the opportunity for a revenue catastrophe significantly increases.  Buyers do not like risk.

b.      Supplier concentration puts your products at risk.  If more than 70% of your products come from less than three suppliers, you run the risk of supply gaps and you have little pricing leverage.

 

4.      Management Risk-

         Business owners always talk about protecting their employees.  Guess what?  Buyers #1 concern is the quality and stability of management and the employees.  If you have really great employees, most buyers will fight to keep them and will ask your help in making that happen.  If you don’t have great employees, they might be dragging your business’ sale price down.

 

5.      Industry Risk-

         Simply, what are the growth prospects for your industry?  If you are making men’s dress suits and ties for a living, your industry should not expect a lot of growth.  If you are in robotics, your tide is rising pretty quickly.

 

6.      Competitive Risk-

a.      What are the barriers to entry in your market?  It is much more difficult to start a medical practice than it is to open a smoothie shop.

b.      What unique skills or services do you offer that your competitors do not?  These competitive advantages are what your sales team uses to convince customers to pay a higher price for your products or services.  They will also enable you to ask for a higher value for your company.

 

7.      Growth Assessment-

a.      How much more can you sell to your existing customers?

b.      How much more of the existing market share can you capture from your competitors?

c.      Do you have an opportunity to profitably move into another geographic region?

 

All of this sounds like the business factors you think about everyday, doesn’t it?

 

Buyers are concerned about the same things as you because they are looking to grow your bottom line and create additional wealth for themselves.  The more clearly you can demonstrate that you have acted on these matters, the higher a valuation you will receive.

 

More importantly, the more of the factors you get right, the more money you will make every day.

 

Chuck Harvey, is the owner of International Business Exchange, Inc., one of the oldest, largest and most respected M&A Advisories in the profession. Prior to IBEX , he served as CEO, COO and CFO of Fortune 500 Companies, thriving middle market companies and start-ups.  His extensive financial experience with the public market, private equity and venture capitalists includes more than three dozen buy-side and sell-side transactions on three continents. He is also the founder of Infusiac, LLC and The One 21, LLC.

Share on Facebook
Share on Twitter
Please reload

Featured Posts